11. Income taxes

The components of the income tax provision are as follows:

	Year Ended December 31,
(In thousands)	2017			2016			2015
Current:
Federal	$	2,379		$	1,776		$	450
State		114			70			22
Foreign		(49	)		2			-
		2,444			1,848			472
Deferred:
Federal		1,097			(257	)		843
State		20			(38	)		35
Foreign		-			-			-
		1,117			(295	)		878
Income tax provision	$	3,561		$	1,553		$	1,350

On December 22, 2017, the United States enacted significant changes to U.S. tax law following the passage and signing of the Tax Reform Act. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a one-time repatriation tax on undistributed foreign earnings. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. Income tax effects resulting from changes in tax laws are accounted for by the Company in accordance with authoritative guidance, which requires that these tax effects be recognized in the period in which the law is enacted.

On December 22, 2017, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. SAB 118 provides a measurement period, not to exceed one year from the enactment of the Tax Reform Act. In accordance with SAB 118, the Company is required to reflect the income tax effects of those aspects of the Tax Reform Act for which the accounting is complete. To the extent there are areas that are incomplete, but are capable of reasonable estimates, a provisional amount is required to be recorded by the Company. If a reasonable estimate is unable to be calculated, the Company is required to disclose why. The Company has recognized provisional tax impacts related to the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions, additional regulatory guidance from Treasury, the Internal Revenue Service and State Governments, and actions the Company may take as a result of the Tax Reform Act.

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction of TransAct's U.S. corporate income tax rate from 34% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax assets at December 31, 2017 and recognized a provisional $1,315,000 charge to income tax expense in the Company's consolidated statement of income for the year ended December 31, 2017.

The Tax Reform Act also provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits ("E&P") through the year ended December 31, 2017. The Company has no undistributed foreign E&P subject to the one-time mandatory repatriation and therefore has not recognized any income tax expense related to undistributed foreign subsidiary E&P for the year ended December 31, 2017.

While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income ("GILTI") provisions and the base-erosion and anti-abuse tax ("BEAT") provisions. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. The BEAT provisions in the Tax Reform Act eliminate the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. The Company does not expect it will be subject to these taxes and therefore has not included any tax impacts of GILTI or BEAT in its consolidated financial statements for the year ended December 31, 2017. Starting January 1, 2018, the Company will account for GILIT and BEAT in the period in which it is incurred to the extent these expectations change.

Our effective tax rates were 52.6%, 30.0%, and 30.4% for 2017, 2016, and 2015, respectively. The effective tax rate in 2017 was unusually high due to the impact of the Tax Reform Act. As explained above we recognized a provisional $1,315,000 charge to income tax expense for the year ended December 31, 2017 as a result of revaluing our net deferred tax assets using the new U.S. corporate tax rate of 21%.

At December 31, 2017, we have no federal or state net operating loss carryforwards and no R&D credit carryforwards or state tax credit carryforwards as of December 31, 2017. Foreign loss before taxes was $563,000, $235,000, and $174,000 in 2017, 2016, and 2015, respectively.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the Consolidated Financial Statements. Our deferred tax assets and liabilities were comprised of the following:

	December 31,
(In thousands)	2017			2016
Deferred tax assets:
Foreign net operating losses	$	328		$	423
Depreciation		107			88
Inventory reserves		845			1,264
Deferred revenue		16			31
Warranty reserve		59			93
Stock compensation expense		694			1,273
Other accrued compensation		363			387
Other liabilities and reserves		246			329
Gross deferred tax assets		2,658			3,888
Valuation allowance		(328	)		(423	)
Net deferred tax assets		2,330			3,465

Deferred tax liabilities:
Other		22			33
Net deferred tax liabilities		22			33
Total net deferred tax assets	$	2,308		$	3,432

As of December 31, 2017 a valuation allowance of $328,000 has been established for foreign net operating loss carryforwards that are not expected to be used. The following table summarizes the activity recorded in the valuation allowance on the deferred tax assets:

	Year ended December 31,
(In thousands)	2017			2016		2015
Balance, beginning of period	$	423		$	340	$	282
Additions charged to income tax provision		67			83		58
Reductions credited to income tax provision		(162	)		-		-
Balance, end of period	$	328		$	423	$	340

Differences between the U.S. statutory federal income tax rate and our effective income tax rate are analyzed below:

	Year Ended December 31,
	2017			2016			2015

Federal statutory tax rate		34.0	%		34.0	%		34.0	%
U.S. corporate tax rate change		19.4			0.0			0.0
Stock option cancellations		1.7			0.0			0.0
Valuation allowance and tax accruals		1.6			1.6			1.3
State income taxes, net of federal income taxes		1.3			0.4			0.8
Uncertain tax positions		(0.1	)		(0.1	)		(0.3	)
Miscellaneous permanent items		(1.9	)		(1.2	)		(0.7	)
R&D credit		(3.3	)		(4.6	)		(4.9	)
Other		(0.1	)		(0.1	)		0.2
Effective tax rate		52.6	%		30.0	%		30.4	%

At December 31, 2017 and 2016, we had $104,000 and $111,000 of total gross unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. We are not aware of any events that could occur within the next twelve months that could cause a significant change in the total amount of unrecognized tax benefits. A tabular reconciliation of the gross amounts of unrecognized tax benefits at the beginning and end of the year is as follows:

	December 31,
(In thousands)	2017			2016
Unrecognized tax benefits as of January 1	$	111		$	114
Tax positions taken during the current period		24			27
Lapse of statute of limitations		(31	)		(30	)
Unrecognized tax benefits as of December 31	$	104		$	111

We expect $28,000 of the $104,000 of unrecognized tax benefits will reverse in 2018 upon the expiration of the statute of limitations.

We recognize interest and penalties related to uncertain tax positions in the income tax provision. As of December 31, 2017 and 2016, we have $17,000 and $18,000, respectively, of accrued interest and penalties related to uncertain tax positions.

We are subject to U.S. federal income tax as well as income tax of certain state and foreign jurisdictions. We have substantially concluded all U.S. federal income tax, state and local, and foreign tax matters through 2013. However, our federal tax returns for the years 2014 through 2016 remain open to examination. Various state and foreign tax jurisdiction tax years remain open to examination as well, though we believe that any additional assessment would be immaterial to the Consolidated Financial Statements.

12. Earnings per share